3 Small-Cap Stocks Putting Up Strong Gains in a Down Year

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Small-cap stocks are supposed to be market leaders when shares are rising, but they’ve fallen by the wayside in 2014. During last year’s epic rally for stocks, the small-cap benchmark Russell 2000 index smoked the S&P 500, gaining 37% to the broader market’s 30% rise.

small-cap stocks, small caps
Source: iStock
This year, however, small caps have been a portfolio burner. Heading into the final quarter of the year, the Russell 200 is down almost 4% for year-to-date, underperforming the broader market by 11 percentage points.

Much of that weak performance can be laid at the doorstep of the Federal Reserve. Small-cap stocks are more sensitive to changes in interests rates than bigger companies, so any time investors start worrying about rate hikes, the little guys get hit disproportionately hard.

Also working against small caps is that they’re still working off some of the excesses of last year’s huge run. Although this year’s underperformance has brought the Russell’s forward price-to-earnings (P/E) multiple down from last year’s lofty levels, it’s still only sitting at its long-term average. At 17 times forward earnings, small-cap stocks are no longer expensive, but they’re hardly cheap either.

Happily, not all small-caps are having bad years. Indeed, some small-cap stocks are having solid-to-excellent years and still look like bargains based on their forward P/Es.

Here are five Russell 2000 stocks bucking this year’s bearish trend that look like they could have more upside ahead.

Small-Cap Stocks: The Andersons (ANDE)

small-cap stocks, small capsANDE Stock YTD Return: 5.5%

Forward P/E: 13

The Andersons (ANDE) does everything from buying, selling and storing grain to running retail stores. But in 2014, the stock is being driven by all-time high operating profits in its ethanol business and forecasts for record harvests of corn and soybeans.

No, ANDE’s year-to-date gain doesn’t outpace the broader market, but it clobbers the negative return on the small-cap index. It’s also significantly less expensive than either the S&P 500 or Russell 2000. Going for just 13 times forward earnings, ANDE stock offers a discount of about 16% to the broader market and 24% to the small-cap index.

Whether ANDE stock has another short-term rally in it remains to be seen, although it did just bounce off support on its 50-day moving average. The long-term prospects are even more alluring. With a return on equity of 18% and a beta of less than 1.0, ANDE has all the markings of a high-quality, low-risk stock.

Small-Cap Stocks: Sanderson Farms (SAFM)

small-cap stocks, small capsSAFM Stock YTD Return: 19%

Forward P/E: 9

Integrated poultry processor Sanderson Farms (SAFM) blew quarterly earnings last month and shares are still having a strong year. SAFM stock is up 19% for the year-to-date, easily beating the Russell 2000 and S&P 500.

True, SAFM stock has been in a downtrend ever since it missed Wall Street’s third-quarter forecasts in late August, but the damage seems to have been done. The stock is coming down toward its 200-day moving average. If it finds support there, then this episode of weakness should be over.

SAFM just hiked its regular dividend and announced a special dividend to be paid Oct. 14 to shareholders of record as of Sept. 30. Speaking of dividends, whatever gyrations the share price has made, SAFM has always been a generous and regular dividend payer with the cash flow to back up its promises.

Small-Cap Stocks: JetBlue (JBLU)

small-cap stocks, small capsJBLU Stock YTD Return: 24%

Forward P/E: 12

Airline stocks are having such a great year that even a big-time laggard like JetBlue is still clobbering both the Russell 2000 and the S&P 500. Southwest (LUV), United Continental (UAL), American Airlines (AAL) and Delta Air Lines (DAL) are all outperforming JBLU — in some cases by a lot — and yet JBLU stock is still up 23% so far this year.

Even better, analysts think the real upside in JBLU stock is yet to come. The airline recently appointed a new CEO with a mandate to drive earnings through cost cuts and — take a deep breath — so-called ancillary offerings. In other words, expect more bag fees and other service charges — as well as tighter seating — in the not-too-distant future at JBLU.

What’s terrible for flyers should be good for JBLU’s bottom line and, by extension, stock price, which currently stands at pretty attractive levels. With a forward P/E of 12, JBLU trades at steep discounts to both the Russell 2000 and S&P 500

 As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/small-cap-stocks-small-caps/.

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